The SEC Is Going Too Easy on Insider Trading
(Bloomberg Opinion) -- At long last, the Securities and Exchange Commission has sketched out a plan to address a difficult issue in the U.S. stock market: how and when corporate insiders, who inevitably have better information than the investing public, can legally trade in the shares of their companies.
The proposal is good, as far as it goes. But it could do a lot more to assure regular investors that insiders aren’t taking advantage of them.
Under current rules, executives and directors can largely avoid charges of illegal insider trading by setting up a predetermined schedule of sales or purchases, known as a 10b5-1 plan. Yet if they know that their company is about to do a big deal or report some bad news, there are still plenty of ways they can use such plans to act on the information. They can set one up for a single trade and act on it the next business day. They can set up multiple plans, then cancel the disadvantageous ones at any moment. It’s hard for the public to understand what’s going on, because many of the relevant details of the plans typically aren’t disclosed or are hard to find.
Now the SEC is moving to make the plans harder to game. Its proposed new rule would establish a 120-day cooling-off period before a first trade can be executed — long enough to erase any informational advantage the insider might have when a plan is created. It would limit single-trade plans to one per year, and effectively disallow executives to have multiple plans simultaneously. All these are positive changes. But in other areas, particularly public disclosure, the SEC’s proposal falls short.
Right now, when an executive creates or terminates a 10b5-1 plan, it’s up to the company to decide whether or not to disclose the move. For example, as far back as 2004, Cisco Systems would regularly file 8-K disclosures about such plans, including the executive’s name, the number of shares and the timeframe for the sales. But starting in 2018, the company stopped providing that level of detail, with no explanation. Absent any formal rules, the company and its lawyers could pick and choose what they wanted to reveal.
The new proposal would require companies to disclose the plans in their quarterly 10-Q financial reports, with some added information (on stock options, for example) in their annual 10-K reports. That’s not good enough. To be truly useful to investors, the disclosure should happen as soon as the plans are created or canceled – for example, under 8-K rules that require filing within four business days, as the SEC’s own investor advisory committee recommended.
Why would the SEC go against investors’ recommendations? Most likely, to satisfy the two Republicans among the agency’s five commissioners – one of whom, Elad Roisman, publicly stated that “this wasn’t the rule I would have written.” The proposal ultimately garnered unanimous support, a rarity in these times of political divisiveness. But even the modest disclosures it requires could yet be watered down or eliminated when corporate law firms start chiming in.
Recent history isn’t encouraging. The SEC was actually more ambitious in 2002, when it proposed that 10b5-1 plans be subject to 8-K disclosure. But various commenters, including large brokerage firms such as Charles Schwab, complained that the requirement would “confuse investors.” Others objected to the added paperwork. The idea was dropped.
As an avid reader of SEC filings, I’ve long argued that more and better disclosure benefits all investors, even if it means a bit more work for the folks that prepare these documents. The latest proposals, assuming they survive corporate lobbying, are a step in the right direction. But they still won’t provide nearly enough information in a way that matters for ordinary investors.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michelle Leder is an expert on SEC filings, having launched her site, Footnoted.com, in 2003 after writing the book "Financial Fineprint: Uncovering a Company’s True Value."
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